BIS published a speech by Fritz Zurbrügg of SNB, wherein he discussed the causes and effects of “too big to fail” (TBTF) and how it manifests itself in Switzerland, before moving on to discuss the reasons the banking regulation before the crisis did not sufficiently address the risks posed by TBTF or systemically important banks. He also described the country’s implementation status regarding the wide-ranging regulatory measures taken at international and national levels to resolve TBTF. He believes that the Swiss big banks and the Swiss banking system are much more “weatherproof” today than they were ten years ago.
As per Mr. Zurbrügg, in Switzerland, the response was quick, targeted, and cost-effective. The regulatory amendments strengthened the resilience of banks and introduced measures to ensure that even a systemically important bank can exit the market in an orderly way in the event of a crisis. Although many of the planned measures have already been implemented, the conditions for resolving TBTF in Switzerland will be in place only after the agreed measures have been fully implemented. With regard to the regulatory response to the TBTF issue, he explained that Swiss regulations in this area rest on two complementary pillars with special requirements for systemically important banks. The first pillar defines measures to strengthen the resilience of these banks and thus reduce the likelihood of a systemically important bank getting into financial distress. The second pillar of the TBTF regulations comes into play in the event that a systemically important bank gets into financial distress, despite increased resilience. It is intended to ensure that a bank is resolvable. For this purpose, the regulations stipulate requirements for resolution planning. By the end of 2019, systemically important banks in Switzerland must prepare “emergency plans” to be able to continue their systemically important functions in Switzerland without interruption in the event of a crisis. The second pillar also specifies requirements for loss-absorbing capacity. Banks can use “bail-in” instruments for this purpose. These are essentially debt securities that can be converted into equity or written down in the event of impending insolvency.
Regarding the status of the fulfillment of these requirements, the latest Financial Stability Report, which was published in June, stated that implementation is already well under way. In terms of the first pillar of the regulations—both big banks are on track. They fully meet the requirements for risk-weighted capital that will apply from the end of 2019. As far as the second pillar—resolution—is concerned, the two big banks (UBS and Credit Suisse) have made further progress. They already meet some of the requirements in full, namely those related to the gone-concern loss-absorbing capacity. However, more progress needs to be made in increasing resilience with regard to the leverage ratio. The work that still needs to be done under the second pillar should not be underestimated. To ensure that a bank can be resolved in an emergency, further progress is needed, particularly in three areas. First, resolution funding plans need to be drawn up, which FINMA, as the competent authority, is in the process of doing. Second, loss-absorbing capacity must be ensured at the level of each individual entity within the big banks. Previously, the focus was on loss-absorbing capacity at consolidated group level. Third, both big banks must further reduce the financial and operational dependencies within the group. In addition, the two big banks need to finalize the required emergency plans for Swiss institutions with systemically important functions by the end of 2019.
He concluded: “We are confident that full implementation of the Swiss ‘too big to fail’ regulations will reduce the false incentives that underlie the issue and create the necessary conditions for resolving the issue here in Switzerland. The state should no longer be obliged to use government funds to bail out a bank.”
Related Link: Speech
Keywords: Europe, Switzerland, Banking, TBTF, Systemic Risk, Resolution Planning, TLAC, Leverage Ratio, SNB, BIS
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
Previous ArticleESA Report Assesses Risks and Vulnerabilities in EU Financial System
Next ArticleESRB Publishes the Annual EU Shadow Banking Monitor
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).